Repeal of Geographically Targeted Economic Development Area Tax Incentives

The California legislature repealed and made changes to all of the Geographically Targeted Economic Development Area (G-TEDA) Tax Incentives. Enterprise Zones (EZ) and Local Agency Area Military Base Recovery Areas (LAMBRA) were repealed on January 1, 2014. The Targeted Tax Areas (TTA) and Manufacturing Enhancement Areas (MEA) both expired on December 31, 2012.

Prior to January 1, 2014, all G-TEDA hiring and sales or use tax credits could be carried over until exhausted. AB 93 changed the credit carryover period to 10 years for any taxable year beginning on or after January 1, 2014. In addition, the EZ Employee Credit and the New Jobs Credit are also repealed as of January 1, 2014. SB 100 and AB 106 were signed by the Governor on September 26, 2013, and made changes to the EZ sales or use tax credits and the time period for obtaining certifications for the EZ, LAMBRA, TTA, and MEA hiring credits.

What effect does this repeal have on the following G-TEDA incentives for businesses?

What effect does the repeal have on the following G-TEDA incentives for businesses?

EZ and LAMBRA hiring credits

For employers engaged in a trade or business in an EZ or LAMBRA, the hiring credit can be generated for qualified employees hired on or before December 31, 2013, for the full 60 month credit period. However, the hiring credit cannot be generated for the employment of any person hired on or after January 1, 2014.

Hiring credit carryovers may still be claimed to the extent of business income apportioned to the former expired or repealed EZ or LAMBRA. The portion of any credit remaining for carryover to taxable years beginning on or after January 1, 2014, may be carried over only for ten taxable years or until the credit is exhausted.

What is the deadline to apply for and obtain an EZ, LAMBRA, TTA, or MEA certification from an authorized local agency?

AB 106 authorizes the local agency to accept applications for certifications during 2014, but all certifications must be issued by the local agency on or before December 31, 2014.

What is FTB's policy regarding allowing hiring credits without a certification (voucher)?

The applicable G-TEDA hiring credit R&TC sections require a qualified taxpayer to obtain and retain the certification and provide it to the FTB upon request. FTB will disallow any hiring credits where these requirements are not met.

What is commencement of employment or the hire date?

Qualified wages are wages received during the 60-month period beginning with the first day the employee commences employment with the qualified taxpayer. For this purpose, commencement of employment or hire date is the first day of employment for which the individual receives wages/compensation.

TTA and MEA hiring credits

The TTA and MEAs expired on December 31, 2012. For employers engaged in a trade or business in an expired TTA or MEA, the hiring credit can be generated for qualified employees hired on or before December 31, 2012, for the full 60 month credit period. However, the hiring credit cannot be generated for employment of any person hired on or after January 1, 2013.

Hiring credit carryovers may still be claimed to the extent of business income apportioned to the former expired TTA or MEA. The portion of any credit remaining for carryover to taxable years beginning on or after January 1, 2014, may be carried over only for ten taxable years or until the credit is exhausted.

EZ sales or use tax credit

All EZs are repealed on January 1, 2014. For taxpayers engaged in a trade or business in a repealed EZ, the sales or use tax credit may only be taken on qualified property purchased on or before December 31, 2013, and placed in service on or before December 31, 2014. The sales or use tax credit is not available for assets purchased on or after January 1, 2014, regardless of when the assets were placed in service.

Sales or use tax credit carryovers may still be claimed to the extent of business income apportioned to the former repealed or expired EZ. The portion of any credit remaining for carryover to taxable years beginning on or after January 1, 2014, may be carried over only for ten taxable years or until the credit is exhausted.

What is the definition of purchased for purposes of the EZ, LAMBRA, or TTA sales or use tax credit?

In general, the purchase date is the date that the Sales and Use Tax liability arises.

EZ and LAMBRA business expense deduction

All EZs and LAMBRAs are repealed on January 1, 2014. For taxpayers engaged in a trade or business in a repealed EZ or LAMBRA, the business expense deduction may only be taken on qualified property purchased and placed in service on or before December 31, 2013. The business expense deduction is not available for assets purchased and placed in service on or after January 1, 2014.

TTA business expense deduction

The TTA expired on December 31, 2012. For taxpayers engaged in a trade or business in an expired TTA, the business expense deduction may only be taken on qualified property purchased and placed in service on or before December 31, 2012. The business expense deduction is not available for assets purchased and placed in service on or after January 1, 2013.

EZ net interest deduction

All EZs are repealed on January 1, 2014. For taxpayers investing in an EZ, the net interest deduction is allowed only for interest payments received or accrued on or before December 31, 2013.

EZ and LAMBRA Net Operating Loss (NOL)

All EZs and LAMBRAs are repealed on January 1, 2014. The EZ or LAMBRA NOL is allowed for losses attributable to the taxpayer’s business activities within the EZ and LAMBRA through December 31, 2013, without regard to the ending date of the taxpayer’s taxable year. For a taxpayer with a taxable year on a fiscal year basis, this loss is calculated by computing the EZ or LAMBRA net operating loss as if the EZ or LAMBRA had remained in existence the entire year, then this full year loss is pro-rated by the number of days the taxpayer operated in an EZ for the taxable year over the total number of days in the taxable year.

TTA Net Operating Loss (NOL)

The repeal has no effect on the TTA NOL since the TTA expired on December 31, 2012.

Can the EZ, LAMBRA, TTA, and MEA hiring credits still be claimed on an amended tax return?

Yes, these credits are not required to be claimed on a timely filed original tax return. However, the qualified taxpayer is required to obtain a certification from a local agency to be entitled to a hiring credit. See also Question 1c above.

What are the new credit carryover provisions?

For any credit remaining for carryover to taxable years beginning on or after January 1, 2014, shall be carried over only to the succeeding 10 taxable years if necessary, until the credit is exhausted. Any credit generated in taxable years beginning on or after January 1, 2014 and unused in the taxable year they were generated may be carried over to the 10 succeeding taxable years after the taxable year the credit was generated. New credits may be generated for individuals hired on or before December 31, 2013 or EZ sales or use tax credit for property purchased on or before December 31, 2013 but placed in service during 2014. The carryover period for these new credits is 10 years from the year the credit was generated.

What effect does the repeal have on the EZ employee credit?

The Enterprise Zone Employee Credit cannot be generated in a taxable year beginning on or after January 1, 2014. This credit was for wages employees received for working within the boundaries of an EZ. This credit can still be generated for the 2013 taxable year, but only for wages received before January 1, 2014 (the EZ repeal date). For more information, get FTB 3553, Enterprise Zone Employee Credit.

What effect does the repeal have on the New Jobs Credit?

The New Jobs Credit cannot be generated in a taxable year beginning on or after January 1, 2014. This credit allowed a qualified employer a credit in the amount of $3,000 for each qualified full-time employee hired during the taxable year that increased the employer’s number of full-time employees over the previous year. This was determined on an annual full-time equivalent basis. This credit can still be generated for the 2013 taxable year. For more information, get FTB 3527, New Jobs Credit.

If a C-corporation has a net loss for regular tax purposes but has positive Alternative Minimum Taxable Income (AMTI), what is the starting point for the EZ business income limitation formula?

Assuming the corporation does not have any nonbusiness income for regular tax or AMT purposes.